Question 1

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Accepted Answer

A) True 
 B)False

Question 2

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Accepted Answer

A)   $1,160.00
B)   $1,166.40
C)   $1,168.65
D)   $1,169.64E) A) and B)
F) A) and C)

Question 3

Svetlana is risk averse. Which of the following is correct about Svetlana?

Accepted Answer

A)   Her marginal utility of wealth increases as her income increases.
B)   She will always accept a bet if the probability of winning a dollar is the same as the probability of losing a dollar.
C)   Her utility function is a straight line.
D)   None of the above are correct.E) A) and C)
F) B) and D)

Question 4

Sometimes On Time SOT)  Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

Accepted Answer

A)   a decrease in the price of a new jet or a decrease in the interest rate.
B)   a decrease in the price of a new jet or an increase in the interest rate.
C)   an increase in the price of a new jet or a decrease in the interest rate.
D)   an increase in the price of a new jet or an increase in the interest rate.E) A) and C)
F) C) and D)

Question 5

Diversifying

Accepted Answer

A)   increases the standard deviation of the value of a portfolio indicating its risk has increased.
B)   increases the standard deviation of the value of a portfolio indicating its risk has decreased.
C)   decreases the standard deviation of the value of a portfolio indicating its risk has increased.
D)   decreases the standard deviation of the value of a portfolio indicating its risk has decreased.E) A) and B)
F) C) and D)

Question 6

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and D)
F) A) and D)

Question 7

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Accepted Answer

A)   You receive the payment 2 years from now and the interest rate is 6 percent.
B)   You receive the payment 2 years from now and the interest rate is 4 percent.
C)   You receive the payment 3 years from now and the interest rate is 6 percent.
D)   You receive the payment 3 years from now and the interest rate is 4 percent.E) All of the above
F) A) and B)

Question 8

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. Suppose the vertical distance between the points (0, A)  and (0, B)  is 12. If his wealth increased from $1,300 to $1,800, then

Accepted Answer

A)   Dexter's subjective measure of his well­being would increase by less than 12 units.
B)   Dexter's subjective measure of his well­being would increase by more than 12 units.
C)   Dexter would change from being a risk-averse person into a person who is not risk averse.
D)   Dexter would forgo the insurance he bought when his wealth was $1,300.E) B) and D)
F) C) and D)

Question 9

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Accepted Answer

A) True 
 B)False

Question 10

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Accepted Answer

A)   about $860
B)   about $870
C)   about $880
D)   about $890E) B) and D)
F) None of the above

Question 11

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)   7%
B)   6%
C)   5%
D)   It is not profitable at any of these interest rates.E) None of the above
F) C) and D)

Question 12

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Accepted Answer

Only news that changes the pub...

Question 13

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Accepted Answer

An example of adverse selection is that ...

Question 14

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Accepted Answer

A)   $485.44.
B)   $496.50.
C)   $509.28.
D)   $515.00.E) None of the above
F) B) and C)

Question 15

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Accepted Answer

A)   For Portfolio A, the average return is 6 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 6 percent and the standard deviation is 25 percent.
B)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
C)   For Portfolio A, the average return is 5 percent and the standard deviation is 25 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 15 percent.
D)   For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.E) A) and C)
F) All of the above

Question 17

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

With a 7% interest rate, the present val...

Question 18

Risk aversion simply means that people dislike bad things to happen.

Accepted Answer

A) True 
 B)False

Question 19

What is the future value of $450 at an interest rate of 9 percent two years from today?

Accepted Answer

A)   $534.65
B)   $546.35
C)   $565.18
D)   $574.13E) B) and D)
F) B) and C)

Question 20

Write the formula for finding the future value in n years of $x today.

Accepted Answer

The answer of Write the formula for finding the future...

Exam 9: The Basic Tools of Finance

Risk aversion simply means that people dislike bad things to happen.

Correct AnswerverifiedShow Answer

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Correct AnswerverifiedShow Answer

What is the future value of $450 at an interest rate of 9 percent two years from today?

Correct AnswerverifiedShow Answer

Give an example of adverse selection and an example of moral hazard using homeowners insurance.

Correct AnswerverifiedAn example of adverse selection is that ...View AnswerShow Answer

Sometimes On Time SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

Correct AnswerverifiedShow Answer

Write the formula for finding the future value in n years of $x today.

Correct AnswerverifiedShow Answer

Suppose that Albert can buy a bond for $1,000 that matures in two years and pays Albert $1,102.5 with certainty. He is indifferent between this bond and one that has some risk but on which the interest rate is 3% higher. How much, to the nearest penny, does the riskier bond pay in two years?

Correct AnswerverifiedShow Answer

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.

Correct AnswerverifiedWith a 7% interest rate, the present val...View AnswerShow Answer

You have been promised a payment of $100,000 in the future. In which case is the present value of this future payment highest?

Correct AnswerverifiedShow Answer

Two years ago Lenny put some money into an account. He earned 6 percent interest on this account and now he has about $1,000. About how much did Lenny deposit into his account two years ago?

Correct AnswerverifiedShow Answer

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Correct AnswerverifiedShow Answer

Svetlana is risk averse. Which of the following is correct about Svetlana?

Correct AnswerverifiedShow Answer

An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose the vertical distance between the points (0, A) and (0, B) is 12. If his wealth increased from $1,300 to $1,800, then

Correct AnswerverifiedShow Answer

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3 percent. The future value of the $500 after 1 year is

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, what changes the price of a share of a corporation's stock? Make up an example.

Correct AnswerverifiedOnly news that changes the pub...View AnswerShow Answer

Which of the following pairs of portfolios exemplifies the risk-return tradeoff?

Correct AnswerverifiedShow Answer

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Correct AnswerverifiedShow Answer

Tim put $275 in the bank one year ago and forgot about it. Today, the bank sent Tim a statement indicating that he now has $294.25 in his account. What interest rate did Tim earn?

Correct AnswerverifiedShow Answer

Diversifying

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An example of adverse selection is that ...
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With a 7% interest rate, the present val...
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Correct Answer
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Only news that changes the pub...
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Correct Answer
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